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Why Don't the Prices of Stocks and Bonds Move Together?

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  • Barsky, Robert B

Abstract

The 1970s were associated with very low real interest rates and a large drop in equity values relative to dividends and earnings. This paper explores the possible roles of increased risk and reduced productivity growth in accounting for the behavior of bond and stock prices in a simple general equilibrium model. Both disturbances unambiguously lower the riskless interest rate, but may cause the stock market to respond perversely depending on the degree of aversion to intertemporal substitution and the share of the corporate sector in total wealth. Copyright 1989 by American Economic Association.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 79 (1989)
Issue (Month): 5 (December)
Pages: 1132-45

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Handle: RePEc:aea:aecrev:v:79:y:1989:i:5:p:1132-45

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  1. Campbell, John, 1986. "Bond and Stock Returns in a Simple Exchange Model," Scholarly Articles 3122544, Harvard University Department of Economics.
  2. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
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  10. James M. Poterba, 1983. "Tax Subsidies to Owner-occupied Housing: An Asset Market Approach," Working papers 339, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Olivier J. Blanchard & Lawrence H. Summers, 1984. "Perspectives on High World Real Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 273-334.
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  13. Fama, Eugene F, 1976. "Inflation Uncertainty and Expected Returns on Treasury Bills," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 427-48, June.
  14. Robert J. Shiller & John Y. Campbell, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Cowles Foundation Discussion Papers 812, Cowles Foundation for Research in Economics, Yale University.
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  18. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  19. Malkiel, Burton G, 1979. "The Capital Formation Problem in the United States," Journal of Finance, American Finance Association, vol. 34(2), pages 291-306, May.
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  22. Rajnish Mehra, 2006. "Recursive Competitive Equilibrium," NBER Working Papers 12433, National Bureau of Economic Research, Inc.
  23. Zvi Bodie & Alex Kane & Robert McDonald, 1985. "Inflation and the Role of Bonds in Investor Portfolios," NBER Chapters, in: Corporate Capital Structures in the United States, pages 167-196 National Bureau of Economic Research, Inc.
  24. Robert E. Hall, 1985. "Real Interest and Consumption," NBER Working Papers 1694, National Bureau of Economic Research, Inc.
  25. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  26. Prescott, Edward C & Mehra, Rajnish, 1980. "Recursive Competitive Equilibrium: The Case of Homogeneous Households," Econometrica, Econometric Society, vol. 48(6), pages 1365-79, September.
  27. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
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